10-Q 1 tenq.txt 10-Q U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 ---------------------------- [ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________________ Commission file number 33-88802 ------------------------- PEOPLES FINANCIAL CORP., INC. ------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Pennsylvania 25-1469914 ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) Ford Street and Fourth Avenue, Ford City, PA 16226 -------------------------------------------------------------------------------- (Address of principal executive offices) (724) 763-1221 -------------------------------------------------------------------------------- (Issuer's telephone number) -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes XX No APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable dates: November 1, 2001 --------------------------- As of November 1, 2001, there were 1,665,412 shares of the Registrant's common stock, $0.30 par value, outstanding. PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY INDEX

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements. PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include Peoples Financial Corp., Inc., and its wholly owned subsidiary, PFC Bank. They have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. They should be read in conjunction with the corporation's consolidated year-end financial statements, including notes thereto, which are included in our 2000 Annual Report on Form 10-K. We believe the unaudited consolidated interim financial statements contain all significant adjustments necessary to present fairly our financial position as of September 30, 2001 and 2000, the results of operations for the three and nine months ended September 30, 2001 and 2000 and cash flows for the nine months ended September 30, 2001 and 2000. NOTE B - EARNINGS PER SHARE Shares used in the earnings per share computation are the weighted average number of shares outstanding during the periods in question. NOTE C - RECLASSIFICATIONS Certain previously reported items have been reclassified to conform to the current year's classifications. The reclassifications have no effect on total assets, total liabilities and stockholders' equity, or net income. NOTE D - COMPREHENSIVE INCOME Total comprehensive income for the nine months ended September 30, 2001 and 2000 was $4,490,862 and $1,224,475, respectively. NOTE E - INVESTMENT SECURITIES Available-for-sale securities consist of the following:

NOTE E - INVESTMENT SECURITIES - Continued Held-to-maturity securities consist of the following:

PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION For the nine months ended September 30, 2001, our total assets increased from December 31, 2000 by $23.4 million. This was primarily the result of increases of approximately $10.4 million in net loans, $6.7 million in liquid assets such as cash and due from banks and federal funds sold, in addition to increases of $5.9 million in held-to-maturity securities and $2.1 million in available-for-sale securities. These increases were offset slightly by decreases in other assets of $1.7 million. Our total assets increased over September 30, 2000 by $26.0 million, as a result of increases of $12.3 million in net loans, investment securities of $7.2 million and $6.5 million in cash and due from banks and federal funds. The increase in total liabilities of approximately $19.8 million from December 31, 2000 to September 30, 2001 is attributable to increases in deposits of $19.0 million and other liabilities of $1.5 million slightly offset by a decrease in deferred taxes of $0.7 million. The increase in total liabilities of $21.4 million from September 30, 2000 to September 30, 2001 is primarily attributable to increases in deposits of $20.4 million, deferred taxes of $0.6 million and other liabilities of $0.4 million. As of September 30, 2001, PFC Bank, our wholly owned subsidiary, had a ratio of non-performing and greater than 90 day delinquent loans to total loans of 0.13% as compared to a ratio of 0.17% as of December 31, 2000 and 0.16% at September 30, 2000. Non-performing loan totals at September 30, 2001 were $294,000 that were delinquent more than 90 days or held on non-accrual status as compared to $369,000 and $350,000 at December 31, 2000 and September 30, 2000, respectively. At September 30, 2001, the allowance for possible loan losses was $1,381,000, which represented 0.61% of total loans as compared to 0.66% at December 31, 2000 and 0.66% at September 30, 2000. Non-performing loans were 3.26% of the allowance for possible loan losses at September 30, 2001, as compared to 6.79% at December 31, 2000 and 9.02% at September 30, 2000. In management's opinion, the allowance for possible loan losses at September 30, 2001 is adequate to absorb future loan losses based on information presently known. Management cannot assure, however, that additions to the allowance will not be required in the future to cover losses that are presently unforeseen. RESULTS OF OPERATIONS Net Income For the nine-month period ended September 30, 2001, we recognized net income of nearly $3.8 million. This represents an increase of $1.2 million over the same period in the prior year. This increase is attributable to an increase of $2.1 million in capital gains taken from the sale of available-for-sale securities and a $0.1 million increase in net interest income offset by increases in provisions for federal income tax of $0.7 million and other operating expenses of $0.3 million. Net income for the three-month period ended September 30, 2001 was $1.7 million, an increase of $0.7 million, compared with the three months ended September 30, 2000. This increase is primarily the result of an increase in capital gains taken from the sale of available-for-sale securities of $1.1 million, offset by an increase in provision for federal income taxes of $0.4 million. Our operating results are largely dependent upon the net income generated by our subsidiary, PFC Bank. PFC Bank has the benefit of a substantially appreciated available-for-sale investment portfolio, the strategic liquidation of portions of which enable us to absorb the negative effects of interest rate fluctuation and still maintain profitable operations. Net Interest Income Interest income for the nine-month period ended September 30, 2001 was $16.5 million, an increase of nearly $0.7 million from the nine-month period ended September 30, 2000. This increase is primarily attributable to a $0.8 million increase in interest on the loan portfolio and an increase of $0.2 million from interest-bearing deposits with other banks, offset by decreases of $0.2 million from interest received from investment securities and $0.1 million from federal funds. Interest expense for the nine-month period ended September 30, 2001 was approximately $8.8 million, a $0.6 million increase over the same nine-month period ended September 30, 2000. Management attributes this increase to the increase in total interest-bearing deposits in addition to an increase in short-term borrowed funds. For the three-month period ended September 30, 2001, interest income was $5.6 million, a $0.2 million increase, compared to the three-month period ended September 30, 2000. This increase is primarily due to increases in interest on loans of $0.2 million and interest-bearing deposits with other banks of $0.3 million, offset slightly by decreases in interest received from investment securities of $0.2 million and federal funds of $0.1 million. Interest expense for the three-months ended September 30, 2001 of $2.9 million is an increase of $22,000 over the same period in 2000. This increase is primarily due to an increase in interest on FHLB borrowings, offset by a decrease in interest on interest-bearing deposits. Provision for Loan Losses The provision for loan losses is based upon management's ongoing assessment of the inherent risk of loss in the outstanding loan portfolio. Management's risk assessment is based on the evaluation of individual loans, past loss experience, current economic conditions, and other relevant factors. While management uses the best information available to make these evaluations, future adjustments to the allowance for possible loan losses may be necessary. PFC Bank continues to monitor its loan portfolio on a regular basis and will make additions to its allowance based on its determination of the necessary level of the allowance. For the nine-month period ended September 30, 2001, PFC Bank recorded $45,000 to the provision for loan losses as compared to $45,000 for the same period in the previous year. Net charge-offs for the nine-month period ended September 30, 2001 were $76,000, compared to $15,000 for the nine-month period ended September 30, 2000. For the three-month period ended September 30, 2001, PFC Bank recorded $15,000 to the provision for loan losses, compared to $15,000 for the same period in the previous year. Net charge-offs for the three-month period ended September 30, 2001 were $61,000, compared to $500 for the three-month period ended September 30, 2000. Activity in the allowance for loan losses was as follows: Nine-Months Ended Year Ended September 30, 2001 December 31, 2000 ------------------ ----------------- Balance, beginning of period $1,412 $1,378 Provision 45 60 Charge-offs (91) (45) Recoveries 15 19 ------ ------ Balance, end of period $1,381 $1,412 ====== ====== Other Income Other income for the nine-month period ended September 30, 2001 was approximately $2.6 million, an increase of $2.2 million over the nine-month period ended September 30, 2000. This increase is primarily attributable to capital gains from the sale of available-for-sale securities of $2.2 million for the nine-month period ended September 30, 2001, compared with capital gains of $9,000 for the same period of 2000. These net gains were primarily the result of the liquidation of a portion of PFC Service Corporation's stock portfolio. Other income for the three-month period ended September 30, 2001 was $1.2 million, an increase of $1.1 million, compared to the same period in 2000. This increase is due to an increase of $1.1 million in capital gains from the sale of available-for-sale securities. Other Expenses Total other expenses increased $285,000 for the nine-month period ended September 30, 2001 when compared to the same period in the prior year. This increase was primarily the result of increases in salary and employee benefits of $21,000, PA shares tax of $20,000, data processing expenses of $18,000 and various other operating expenses of $287,000, offset slightly by a decrease in occupancy expenses of $61,000. Other expenses for the three-months ended September 30, 2001 of $1.5 million increased $112,000 over the three-month period ended September 30, 2000. This increase was primarily the result of increases in salaries and employee benefits of $9,000, PA shares tax of $6,000, data processing fees of $4,000 and $110,000 in various other expenses, slightly offset by decreases in occupancy expense of $17,000. Maintaining a focus on operating cost control has become increasingly important and we believe we have succeeded in maintaining a relatively stable overhead burden. Provision for Income Taxes Our provision for income taxes was $1,687,000 for the nine-month period ended September 30, 2001, compared to $970,000 for the same period ended September 30, 2000. During the three-month period ended September 30, 2001, we incurred a provision for income taxes of $762,000, compared to $342,000 for the same period the previous year. State tax liabilities are incurred both by PFC Bank, in the form of Pennsylvania Bank Shares tax, and by the corporation, as a separate entity. Liquidity Liquidity is the availability of funds to meet the daily requirements of the business. For financial institutions, demand for funds comes principally from extensions of credit and withdrawal of deposits. Liquidity is provided by asset maturities, sales of investment securities, deposit growth or short-term borrowings. Liquidity measures are formally reviewed by management monthly, and they continue to show adequate liquidity in all areas of the organization. Capital Adequacy PFC Bank is subject to various regulatory capital requirements administered by federal banking agencies. Quantitative measures established by regulation to ensure capital adequacy require the bank to maintain a minimum leverage ratio and ratios of total capital and Tier I capital to risk-weighted assets. Equity and risk-based capital ratios for the bank exceed these minimums ratios and are as follows: September 30, December 31, September 30, 2001 2000 2000 ------------- ------------ ------------- Leverage Ratio 9.00% 8.69% 8.45% Risk-Based Capital 20.60% 17.72% 17.44% Tier I Capital 15.50% 13.11% 12.88% Regulatory Activity In recent years, Pennsylvania enacted a law to permit state chartered banking institutions to sell insurance. This follows a U.S. Supreme Court decision in favor of nationwide insurance sales by banks. The decision also bars states from blocking insurance sales by national banks in towns with populations of no more than 5,000. PFC Bank does not currently have plans to enter the insurance field but continues to review this option. Congress recently enacted legislative reforms to modernize the financial services industry, including repealing the Glass Steagall Act, which prohibits commercial banks from engaging in the securities industry. Consequently, equity underwriting activities of banks may increase in the near future. However, the corporation does not currently anticipate entering into these activities. Management estimates that changes in the bank's FDIC assessment rate, resulting from the enactment of the Deposit Insurance Funds Act of 1996, will adversely impact the results of operations net of income taxes. Prior to this enactment, the bank was not required to pay any FDIC assessment. Although the bank is in the minimum assessment bracket, income will be impacted in the amount of $50,000 for the year ended December 31, 2001. The act also provides regulatory relief to the financial services industry relative to environmental risks, frequency of examinations, and simplification of forms and disclosures. From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restrictions on, the business of the corporation and of the bank. Management cannot predict whether such legislation will be adopted or, if adopted, how such legislation would affect the business of the corporation and the bank. As a consequence of the extensive regulation of commercial banking activities in the United States, the corporation's and the bank's business is particularly susceptible to federal legislation and regulations that may increase the costs of doing business. Except as specifically described above, management believes that the affect of the provisions of the aforementioned legislation on liquidity, capital resources, and results of operation of the corporation will be immaterial. Management is not aware of any other current specific recommendations by regulatory authorities or proposed legislation, which, if they were implemented, would have a material adverse effect upon liquidity, capital resources, or results of operation, although the general cost of compliance with the numerous and multiple federal and state laws and regulations does have, and in the future may have, a negative impact on the corporation's results of operations. Further, the business of the corporation is also affected by the state of the financial services industry, in general. As a result of legal and industry changes, management expects the industry will continue to experience an increase in consolidations and mergers as the financial services industry strives for greater cost efficiencies and market share. Management also expects increased diversification of financial products and services offered by the bank and its competitors. Management believes that such consolidations and mergers, and diversification of products and services may enhance the bank's competitive position as a community bank. Forward-Looking Statements From time to time, we may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, we note that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of our business include the following: general economic conditions, including their impact on capital expenditures; business conditions in the banking industry; the regulatory environment; rapidly changing technology and evolving banking industry standards; competitive factors, including increased competition with community, regional and national financial institutions; new service and product offerings by competitors and price pressures; and similar items. Gramm-Leach-Bliley Act On November 12, 1999, the Gramm-Leach-Bliley Financial Modernization Act was signed into law. The Act has a profound impact on the financial services industry. o The Act repeals prior legislation to permit commercial banks to affiliate with securities firms and insurance companies. More importantly, the Act significantly expands the authority of each of these financial industries to engage in a full array of financial services. Thus, each industry may now engage in activities previously reserved to one or the other. o The Act authorizes bank holding companies meeting defined standards to engage in a substantially broader range of non-banking activities than was permissible before the legislation passed. o A new hierarchy of existing state and federal regulators will monitor both the bank and the corporation. The Act coordinates the efforts of these regulators. The goal is to lessen regulatory burden and prevent duplication of examination efforts. Also, all financial institutions are required to take reasonable precautions to protect the security and confidentiality of personal customer information. The bank or corporation may only share customer information with its affiliates under certain circumstances. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in our interest rate risk position since December 31, 2000. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the corporation's business activities. PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY PART II. OTHER INFORMATION ITEM 1. Legal Proceedings Details concerning the civil action filed in the Court of Common Pleas of Armstrong County, Pennsylvania on November 29, 2000 are set forth in the annual report of 10K for December 31, 2000. There have been no material developments in the third quarter of 2001. ITEM 2. Changes in Securities Not applicable. ITEM 3. Defaults Upon Senior Securities Not applicable. ITEM 4. Submission of Matters to a Vote of Security Holders There was no submission of matters brought to a vote of security holders in the third quarter of 2001. ITEM 5. Other Information Not applicable. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Registrant's Articles of Incorporation. (Incorporated by reference in Registrant's January 27, 1995, filing on Form S-4). 3.2 Registrant's By-Laws. (Incorporated by reference in Registrant's January 27, 1995, filing on Form S-4). 10.1 Agreement between R.B. Robertson and Bank. (Incorporated by Reference in the Registrant's September 30, 1997 filing on Form 10-QSB). 10.2 Settlement Agreement. (Incorporated by Reference in the Registrant's December 31, 1996 filing on Form 10-KSB). 10.3 General Release (Incorporated by Reference in the Registrant's December 31, 1996 filing on Form 10-KSB). PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY PART II OTHER INFORMATION (cont.) ITEM 6. Exhibits and Reports on Form 8-K (cont.) 10.4 Amendment to Executive Employment Agreement dated October 20, 1999, between R.B. Robertson and Bank. (Incorporated by Reference to Registrant's September 30, 1999 filing of Form 10Q). 10.5 Amendment to Executive Employment Agreement dated November 17, 1999 between R.B. Robertson, PFC Bank and Peoples Financial Corp., Inc. (Incorporated by Reference to the Registrant's December 31, 1999 filing of Form 10-K). 11 Statement re: Computation of Earnings Per Share. (included herein at Part I, Item 1, Page 2 of this Form 10-Q). (b) Reports on Form 8-K The Registrant did not file any current reports on Form 8-K during the quarter ended September 30, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 2, 2001 -------------------- PEOPLES FINANCIAL CORP., INC. (Registrant) /s/ R.B. Robertson ------------------------------------------ R.B. Robertson President & Chief Executive Officer /s/ James L. Kifer ------------------------------------------ James L. Kifer Executive Vice President & Asst. Secretary EXHIBIT INDEX

PEOPLES FINANCIAL CORP INC /PA/ 10-Q